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Category Archives: Economics

As we draw closer to the UK’s referendum on leaving the EU, the economic arguments for and against Brexit are becoming clearer. A favourite europhile argument is that half our exports go to the EU, and we mustn’t jeopardise that trade by leaving the single market. The eurosceptics have a very compelling response, brilliant in its simplicity:

We buy more from the rest of the EU than the EU buys from us (think of all those BMWs and bottles of French wine), so the EU will want to maintain the same free trade relationship with us even if we leave.

This makes complete sense. It suggests we hold the stronger negotiating position thanks to our EU imports. It’s an easily understood truth that is regularly deployed by Nigel Farage and other eurosceptics.

But as the Economist points out this week, there is a competing truth to consider:

The EU takes almost half of British exports, whereas Britain takes less than 10% of the EU’s.

Now who has the power?

The first truth refers to the absolute value of our imports and exports; but the more relevant truth, as far as a negotiation is concerned, is the relative importance of those imports and exports to each party. Bluntly, the EU is an awful lot bigger than the UK, and isn’t going to care nearly so much if trade breaks down. Of course, it’s in everyone’s interest to maintain free trade, but if other factors complicate EU calculations – such as our general awkwardness – then the EU is much better placed to walk away from the negotiating table than we are.

The California Labor Commissioner recently ruled that an Uber driver was an employee, not an independent contractor. The chairwoman of New York’s Taxi and Limousine Commission took the opposite view. The issue is now being considered by more than one US court, with some Uber drivers suing for employee status in order to gain extra rights and benefits. TaskRabbit, Lyft and AirBnB may soon face similar demands. The law, it seems, is not clear, opening up the opportunity to fiddle with definitions and thereby shape employment reality.

The so-called “freelance economy” is not the only story challenging our conception of what it means to be an employee. Before Uber came along and disrupted everything, 88% of taxi drivers were already contractors. FedEx and McDonalds have recently been accused of misclassifying thousands of workers in order to avoid labour law requirements, taxes and benefits. Microsoft did something similar in the 1990s. In the UK and elsewhere, laws are frequently enacted and amended to address the tax implications of professional workers turning themselves into limited companies which are then hired by their former employers. Over 1,500 BBC workers, including Jeremy Paxman and Anne Robinson, were found to be using service companies, saving the broadcaster from paying national insurance contributions. Zero-hours contracts have become a toxic issue in British politics.

Governments need to be able to collect payroll tax, but if tax codes are well crafted it should be irrelevant whether it is paid by the employer or the worker. If Uber is forced to designate its drivers as employees and start paying social security contributions, then they will simply pay the drivers less. This should have no impact on the take-home pay of law-abiding drivers who have been paying their own self-employed taxes and levies. As the Economist puts it, “conventional economics says the burden of a tax cannot be altered just by changing which party writes the cheque.” The same could be true for pension contributions and health insurance: there’s no reason in a well-functioning market why the sensible freelancer can’t make the same provisions as an employer from their higher wage packet.

As new business models proliferate and go global, national lawmakers will struggle to keep up. So what should they focus on? Probably not the labels. People need stable paid work, pensions and insurance against misfortune; governments need taxes. So long as these can be achieved in one way or another, it may not matter whether we are employees, contractors, franchisees or freelancers.

The Conservatives have launched a campaign poster declaring “THE DEFICIT HALVED”. This is odd, as up until a few weeks ago they had been telling us they’d cut the deficit by a third.

To quote the Spectator’s Fraser Nelson, who drew attention to this shameless reshaping of British economic reality, “In the first six months of 2010 the government borrowed an extra £65.9 billion. In the first six months of 2014 year, it was £44.2 billion – so down by a third.”

Then how did our honest leaders come up with the “deficit halved” claim? Easy. They just redefined the word “deficit”. To most of us, the deficit is a cash figure: the money the government has to borrow to pay for public spending not covered by taxes etc. It is the amount we add to our national debt each year. Now, magically, it means something different: “deficit” is apparently shorthand for “deficit as a percentage of GDP”. And as GDP has risen over the last five years (it could hardly have done otherwise), this convenient ratio has fallen faster than the actual cash value of the deficit.

Tories will argue that the ratio is what matters in practice – the cash figure is meaningless unless you know how big is the economy that is incurring the resulting debt. But that doesn’t make their pre-election definition-fiddling any less sneaky.

The headlines today are celebrating the UK’s return to pre-crisis levels of economic output. GDP is back where it was in 2007. Deputy Prime Minister Nick Clegg declared, “The fact that the British economy is now as large, if not slightly larger than it was just before the crisis happened, shows that the rescue mission that we said was the principal purpose of this Government has worked.”

But is this GDP figure remotely relevant? The Chancellor and his cheerleaders would like us to believe it is a highly significant milestone in the country’s slow slow recovery. But the total size of the UK’s economy is not nearly as important as the level of output per person.

Because while we may, as a country, be producing as much as we were before the crash, there are now many more of us doing the production. Over two million more, in fact. Our output per person remains well below 2007 levels, which is why our living standards remain depressed. If we were truly back to where we started, we would expect the economy to have grown by at least as much as the population.

What practical significance is there in the truth that the total size of the economy is back to pre-crash levels? Absolutely none. This moment is purely symbolic — which won’t stop the government milking it to the full.

A study entitled “The Fiscal Effects of Immigration to the UK” has just been published by University College London. It argues that recent immigrants are less of a burden on the state than British natives, and indeed have made a more positive financial contribution to the UK than the average local. Welcome news, especially given the hostility to immigrants in certain sectors of the media and British society.

However, this is a fiendishly complex subject and inevitably the headline changes dramatically if different factors are included in the calculation.

For example, most recent immigrants are of working age, and therefore are more likely to be in employment than all our retired natives. If these immigrants remain in Britain as they age then the state will have to bear considerable future health and pension costs. The study celebrates the taxes immigrants pay now without considering the later benefits they will justifiably claim if they settle here permanently.

A crude but common complaint against immigrants is that they “steal British jobs”. Often they are better skilled or more diligent than their native rivals, and employers benefit accordingly, contributing to the UK economy through increased corporation tax, more competitive exports, or cheaper goods and services. If this economic gain from high performance immigrant labour were factored in to the calculation, the net contribution of immigrants would look even rosier. But the fact remains that many of the jobs filled by immigrants would otherwise have gone to British natives who must instead depend on the state. The cost of their unemployment benefits and the loss of their income tax ought to be weighed against the tax contribution of the immigrants who have replaced them.

We should also consider what different workers do with their wages. Recent immigrants are very likely to send remittances abroad, taking earnings out of the British economy. The British workers they’ve replaced would have returned a greater proportion of their discretionary expenditure to British businesses (if only the local pub). There is a multiplier effect whereby for every extra pound spent in the UK economy fractions of that pound will be spent and re-spent, with taxes paid to the state each time; similarly, a pound lost to the economy reduces total economic activity by considerably more than one pound. Even if she never claims a penny of state welfare, a Pole who (quite reasonably) sends half of her income to her family in Poland is diminishing UK economic activity (and therefore UK tax receipts) if that income would otherwise have gone to a native worker.

This is a highly charged subject, and I should stress that I’m all for immigration into the UK. We benefit beyond measure culturally, intellectually and creatively from all the energetic, skilled and enterprising people who devote their best years to this wet, grey island. But putting immigrants on a set of financial weighing scales to prove their value is dangerous. Too many different truths can be claimed by selectively including or omitting the various complicating factors discussed above. Make the case for immigration on a purely fiscal basis, and you may well find your opponents come up with a more compelling calculation that tells a very different story.

So is it true? Is “Red Ed” really promising Britain a new Socialist future? Time for a definition of Socialism from the OED:

a political and economic theory of social organization which advocates that the means of production, distribution, and exchange should be owned or regulated by the community as a whole

or

(in Marxist theory) a transitional social state between the overthrow of capitalism and the realization of communism

Pretty radical stuff, even if we leave aside the Marxist definition. No wonder the right wing press are up in arms. But what has Mr Miliband actually threatened to do? Freeze gas and electricity prices for 20 months, split up the big energy firms, replace the energy regulator, and give councils compulsory purchase powers to buy land from developers who “hoard” sites with planning permisssion. I’m not saying these are sensible policies if we want to encourage investment in new energy generation or house building, but they don’t come close to the OED’s definitions. The USA, hardly a beacon of socialism, has rent controls and numerous other market regulating devices, and famously broke up Standard Oil and AT&T. As for compulsory purchase powers, they already exist — no one thinks the communists are coming just because the government buys up a stretch of farmland to build a motorway.

Until Mr Miliband decides to nationalise whole industries (the means of production, distribution, and exchange), or create new government departments with extraordinary powers to tell Tesco, BP and Vodafone how to run their businesses, surely the truth is he’s a million miles from socialism. And yet, he himself says he’s bringing socialism back and plenty of intelligent commentators agree with him. A different, looser, definition of socialism seems to have taken root. It’s as if, in a world where capitalism has so entirely vanquished its ideological rivals, we’ve recalibrated the word to mean anything that departs even mildly from pure free market economics.

Does any of this matter? Well, it’s interesting to note that the newspapers which agree with Mr Miliband’s definition — his truth — are the ones that least want to see him elected. Editors and columnists certainly understand the importance of picking the most (or least) favourable truth. Maybe Slightly Pink Ed should follow their example.

Truth 4 is startling, and is best explained by the very low rate of home ownership in Germany compared to other countries, as well as the legacy of East German integration and the smaller average household size found in Germany.

Conclusion: The German economy is the biggest in the Eurozone (Truth 1), but aside from a bunch of very wealthy individuals (Truth 2) Germany’s people are not the richest. Looking at Truth 3 and Truth 4 it is easy to see why many ordinary Germans feel thoroughly aggrieved at the idea of having to bankroll the rest of the Eurozone.